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Tax Reform, Indictments, the Fed: Another Eventful Week in Washington

November 6, 2017

From a policy perspective, last week in Washington was marked by significant economic policy developments. President Trump officially announced his intention to nominate Jerome Powell to take over the helm of the Federal Reserve; the White House and Congressional Republicans finally unveiled the full legislative text of their tax reform proposal, which the President has signaled he would like to sign into law by the end of this year; and the President signed into law a resolution passed by Congress, repealing the Consumer Financial Protection Bureau’s arbitration rule.

On the political front, however, it was not nearly as jubilant a week for the White House. The announcements of the first indictments handed out by the Special Counsel investigating any links or coordination between the Russian government and the Trump campaign put the West Wing on notice that Special Counsel Robert Mueller is making quick work of his mandate, despite the Administration’s productive several days on the policy front.

The release of the GOP’s tax reform plan in the House of Representatives provided both the general public and the vast majority of the rank-and-file Congressional Republicans with the first opportunity to see the details of the package. Why was the bill introduced in the House rather than the Senate, you ask? The answer is that our founding fathers require it: The Origination Clause of the Constitution requires that all bills raising revenue must originate in the House of Representatives.

As introduced, the “Tax Cuts and Jobs Act of 2017” would:

Create four individual tax brackets, maintaining a 39.6% rate for the highest-income Americans;

Increase the standard deduction to nearly double its current amount;

Eliminate the Alternative Minimum Tax;

Decrease significantly the home mortgage interest deduction, limiting the deduction for interest on mortgages up to $500,000, down from the current level of $1 million (existing homeowners would be grandfathered in);

Cap the state and local property tax deduction at $10,000;

Preserve the tax treatment of contributions to 401K plans (rather than limit them, as had been contemplated); and

Lower the corporate tax rate to 20% from today’s rate of 35%.

The release of the text of the bill undoubtedly was an important development in both the President’s and the GOP Congress’s quest to enact tax reform, but the road towards a White House signing ceremony of a tax reform bill continues to be littered with potential landmines. With the cat now out of the bag, powerful, influential lobbying organizations, such as the National Association of Realtors, which has scores of members in literally every Congressional district across the country, will descend on Capitol Hill in an attempt to see the provisions they don’t support (in this case, the reduction of the home interest mortgage deduction) amended in their favor. Thus, tax reform now becomes an enormous chessboard. Every change the GOP leadership and the White House agree to make in gaining the support of a member of the House whose vote is needed to pass the bill carries the very real risk of losing the support of another member as a result. Already, for example, House Republicans from high-tax states such as New York and New Jersey have signaled they cannot support the bill in its current form because of the reduction in the deductibility of state and local property taxes.

In more traditional circumstances, the White House, which has staked its ability to enact meaningful economic policies on the success or failure of tax reform, would pressure these types of members to support the bill, promising Presidential visits to their districts, reelection endorsements, or some other favors in return. These, of course, are not normal circumstances. President Trump famously campaigned as a political outsider. Though that certainly provided him with populist street cred that no doubt played a large part in carrying him to 1600 Pennsylvania Avenue, it also has meant that thus far he has had limited ability to tip the scales on Capitol Hill in favor of his legislative agenda. Shepherding tax reform through the House will be a monumental test of both the White House’s and Congressional leadership’s abilities, especially with a stated year-end deadline. It is therefore highly probable that if the President insists on such a short timeline, Republicans will be forced to abandon a comprehensive package and revert instead to a more straightforward bill that simply reduces rates.

As Congress was focused on the details of the tax reform package, on November 2, President Trump nominated Jerome Powell to succeed Janet Yellen as the next Chair of the Federal Reserve Board of Governors. The President’s decision not to ask Yellen to stay on marks the first time in 40 years that an incumbent Fed Chair was passed over for a second term. Though Powell, who is currently a sitting Fed governor, is generally perceived as slightly more hawkish than Yellen with regard to monetary policy, his ascension will likely ensure a continuation of the slow, methodical return to normalcy—incremental rate increases paired with deliberate shrinking of the Fed’s balance sheet—that Chair Yellen steered during the last couple of years. Powell is likely to gain sufficient support in the Senate to win confirmation and take over from Yellen when her term expires on February 3, 2018.

Lastly, Special Counsel Mueller’s indictments of Paul Manafort and Richard Gates—two former Trump campaign officials—set Washington abuzz last week. Though none of the charges that either faces relate directly to their work on the Trump campaign, the indictments were the first concrete evidence that Mueller’s investigation found wrongdoing. The bigger news, however, was that the Special Counsel had secretly indicted George Papadopoulos—a low-level Trump campaign volunteer with regular communication with other Trump officials—back in July, but had kept his arrest under wraps. Papadopoulos pled guilty in early October to making false statements to the FBI regarding his interactions during the campaign with individuals he knew to be connected with the Russian government. The assumption that most legal experts have made is that during the period between his arrest in July and his plea in October, Papadopoulos wore a wire to help the Special Counsel gather evidence on other Trump campaign officials. This theory was bolstered by a statement made by the Special Counsel’s office that was included in Papadopoulos’s plea deal, in which the Special Counsel refers to Papadopoulos as a “proactive cooperator.” Thus, even amidst one of the more productive weeks it has had since taking office, the Administration still finds itself on the defensive, bracing for the next shoe to drop.

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